In this week’s Articles of Interest, I am sharing an article from Michael Finke of Investment News titled Let’s Get Real About Dividend Stocks.
The idea of investing in dividend paying stocks is appealing. The premise is that you would live off of the dividends and hopefully never have to tap into your principal. But is this actually a good idea?
In the article Michael does a fantastic job explaining that dividends do not actually increase your account value at the time the dividend is issued. Instead, what technically happens is that you receive a dividend but the share price drops by the same amount. And this all means that your overall account value is the same before the dividend is issued and after.
So, in essence, dividends are sort of a mirage.
Now this is not to say that dividend stocks are worthless, because they do play an integral part in diversifying your portfolio. It’s the same reason we wouldn’t want to hold a portfolio of only non-dividend paying stocks. You want both!!
So, although an investor may decided to have a portfolio of dividend only stocks, that doesn’t mean it is an effective investment strategy. Granted, it does have an interesting appeal, but how do dividend stock strategies compare to other investment strategies?
Dividends are just one of four ways to receive money from an investment. The other three are share price growth, interest, and capital gains. At our firm we employ a total return strategy to take advantage of all four.
The reason we do this is because research shows that there is no reliable evidence that a dividend only strategy is superior. Additionally, research from Dimensional Fund Advisors shows that a total return strategy can actually be quite beneficial from a return and diversification standpoint.
Furthermore, the author of this week’s Articles of Interest references research pointing out that dividend stocks significantly underperform low dividend value stocks, which many of you know us to be a fan of.
So with all of this in mind, it is evident that a dividend only strategy is not only a mirage but could potentially be exposing you to other areas of risk you might not have been aware of. It would be one thing if you were compensated in higher returns for this risk, but the research shows you likely would not.
I hope that you have found this week’s Articles of Interest informative and helpful.
Please feel free to share any comments, questions, or experiences you have below.
If you’re new to our blog and wish to receive weekly financial planning tips, please sign up for our eContent.